Lessons on Tax Breaks from Amazon

Posted February 18, 2019

When Amazon announced that they were ready to open a second headquarters, hundreds of cities across the nation courted them with tax breaks.

New York City won the competition, and Amazon got ready to put in $2.5 billion to build the new facility in Queens. NYC met them more than halfway with $2.8 billion in special tax incentives and subsidies. City leadership claimed that the investment would net them $27 billion in tax revenue over the long run. Amazon claimed that the Queens operation would bring 25,000 jobs to the city. If the jobs promise played out, Amazon would have received more than half a million in capital grants and $1.2 billion in tax exemptions under the Excelsior Jobs Program, a pre-existing program.

Questions arose almost immediately. Protestors attended the first meeting between Amazon and city officials, and protests continued through the holiday shopping season. Political leaders foresaw a rise in rents, traffic and housing issues, and public money going to Amazon instead of to public needs.

Amazon cuts out

On Valentine’s Day, Amazon announced at their blog that they would not go ahead with the NYC headquarters:

After much thought and deliberation, we’ve decided not to move forward with our plans to build a headquarters for Amazon in Long Island City, Queens. For Amazon, the commitment to build a new headquarters requires positive, collaborative relationships with state and local elected officials who will be supportive over the long-term. While polls show that 70% of New Yorkers support our plans and investment, a number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward with the project we and many others envisioned in Long Island City.

Responding to the news that Amazon would not be expanding in New York as initially planned, Rep. Alexandria Ocasio-Cortez (D-NY) didn’t mince words. “Today was the day a group of dedicated, everyday New Yorkers and their neighbors defeated Amazon’s corporate greed, its worker exploitation, and the power of the richest man in the world,” she said in a tweet.

Lawmakers respond

One response to the Amazon pull out is a proposal to forbid the kind of tax incentive competition that brought Amazon to New York City in the first place. The End Corporate Welfare Act is being discussed not only in New York state, but also in Arizona, Illinois, and several other states.

Assemblyman Ron Kim and state Sen. Julia Salazar are sponsoring the bill in New York. They claim that the “race to the bottom” effect of competitive tax incentives ends up benefiting the large corporations rather than the people. They believe that Amazon would have brought in workers rather than hiring local people, that the jobs provided would not have created a living wage in Queens, and that the influx of new workers would have strained local schools.

Do tax incentives pay off?

Michael Farren of the Mercatus Center at George Mason University says big tax incentives are less important to corporations than the quality of the local workforce. “Most money spent on economic development is wasted—it’s just icing on the cake that the corporation would have already picked,” Farren told the Observer. “The practice continues because it allows politicians to claim credit for ‘creating jobs.’”

A study conducted at the Center found that the average cost of a new job created in big tax incentive deals like these is $658,427. Communities don’t end up benefiting from these deals.

Puerto Rico’s Section 936 was a good example of this phenomenon. It is estimated that pharmaceutical companies operating under Section 936 got $2.67 in federal tax savings for every $1.00 they paid a worker in Puerto Rico. The General Accounting Office (GAO) concluded in 1997 that ” an increasing portion of the income produced in Puerto Rico went to U.S. and foreign investors” rather than the local community. With such lackluster results, the tax benefit was fully replealed by 2006.